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Transitory and permanent disturbances and the current account: an empirical analysis in the intertemporal framework

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  • Ferdaus Hossain

Abstract

The intertemporal models of current account determination demonstrate that in the analysis of the current account balance of a country, it is important to distinguish between transitory and permanent disturbances in income and relative prices. This paper attempts to decompose the observed data on income and real exchange rate into transitory and permanent components and then uses the decomposed series to test the empirical validity of the predictions of the intertemporal models. Evidence from the United States and Japan provide very limited support for the intertemporal models in terms of the effects of transitory and permanent changes in income on current account balance. For both US and Japan, the study finds that permanent changes in real exchange rate have significant effects on the current account balance. Statistical tests find no evidence of hysteresis in the trading relations of the two countries.

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  • Ferdaus Hossain, 1999. "Transitory and permanent disturbances and the current account: an empirical analysis in the intertemporal framework," Applied Economics, Taylor & Francis Journals, vol. 31(8), pages 965-974.
    • Handle: RePEc:taf:applec:v:31:y:1999:i:8:p:965-974
    DOI: 10.1080/000368499323689
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    Cited by:

    1. Narayan, Seema & Narayan, Paresh Kumar & Tobing, Lutzardo, 2021. "Has tourism influenced Indonesia’s current account?," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 225-237.
    2. Elif Arbatli, 2008. "Futures Markets, Oil Prices and the Intertemporal Approach to the Current Account," Staff Working Papers 08-48, Bank of Canada.
    3. Narayan, Seema, 2013. "A structural VAR model of the Fiji Islands," Economic Modelling, Elsevier, vol. 31(C), pages 238-244.
    4. Seema Wati Narayan, 2020. "Asian Current Account Balances And Spillovers From A Foreign Country, A Region And The United States," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(1), pages 1-24, April.

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